Socially Responsible Investing Going Forward

If you’re one of the growing number of people who expect their investment dollars to make the world better and not worse, you’re already involved in socially responsible investing (SRI). The term covers a lot of territory, but it often focuses on one or several of the following factors: environmental awareness, consumer protection, product safety, human rights, and the absence of discrimination. Socially responsible investing may involve seeking out companies that are ethically aligned with the investor, but it may also refer to the exclusion of certain businesses based on their products, industries, or controversial business practices. Common exclusions may include alcohol, gambling, fracking, and firearms. Over the past few years, the increasing market for SRI has created both a shift in corporate attitudes and a number of new investment products catering to this market demand.

To provide some clarity on both the size of the market for SRI and the growing demand for it, consider some numbers published by the Forum for Sustainable and Responsible Investment in its annual report: The total U.S.-domiciled assets under management using SRI strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, an increase of 76%. Further, these assets now account for more than one out of every six dollars under professional management in the United States.

For some investors, the decision about whether or not to engage SRI concepts may be a function of simply not knowing that these investment options exist. But if you have a conversation with a financial planner or money manager, you might be asked whether it’s important to you to have investment options that consider both financial return and social good. That question could lead to investments in socially responsible ETFs or mutual funds that may not have otherwise been a consideration in your portfolio.

Companies have to weigh the risks and benefits when it comes to engaging (or avoiding) socially responsible programs. As Morningstar has recently pointed out, the implementation of socially conscious principles may lead to business advantages, such as the avoidance of certain political and legal risks. Socially responsible programs can also act as a form of positive advertising for some businesses, as messages spread quickly due to the popularity of social media. However, the cost of complying with environmental, social, and corporate governance standards can be a big financial hurdle for some businesses, and that deserves careful consideration.

Of course, for most people, investing is about the potential to earn a return on their money. Some of the more popular socially responsible ETFs can now claim solid performance during 2014, even if they don’t quite match the return of an investment tracking a broad market index such as the S&P 500. Measuring the overall performance of these investments is still a tricky process because of the various number of investments that can claim some level of social responsibility. For example, the alternative energy sector, often embraced by the environmentally conscious, struggled over the past year as declining oil prices caused some investors to shun solar companies. However, the MSCI KLD 400 Social index, a broader and more diversified SRI index, did quite well over the past year. It also managed to avoid the struggling energy sector because the index contains less than a 5% energy weighting.[1]

So how does a retail investor gain access to these investments? One of the easiest ways is through exchange-traded funds and exchange-traded notes. These vehicles track various indexes, which slice and dice the socially responsible investment market in ways that may appeal to a broad cross-section of investors. If you prefer a mutual fund, a simple online screener can produce a fairly robust list. Keep in mind that each of these investments may approach SRI in a different way, so you may want to consider doing research on additional factors, such as how long the funds have been open, the management team, performance, and annual expenses.

The data discussed above shows us that socially responsible investing is more than just a trend. Many investors are making it a priority to invest their money in companies that not only have the potential to generate profit, but to do so in a way that also encourages social good. Similarly, some companies are giving more thought to their overall behaviors and how that might affect their reputation and profitability in the future. Fortunately, new investment products that can provide investors with improved access to this space continue to reach the market.

[1] As measured by the Wilderhill Clean Energy Index, which underperformed the S&P 500 by 33% as of the 12-month period ending March 29th, 2015. The MSCI KLD 400 Social index trailed the S&P 500 by just .84% in the trailing 12-month period ending March 29th, 2015. As of March 29th the MSCI KLD 400 Social index had a 4.41% weighting in energy.